chapter 1-4 macroeconomics

Economics

The study of how individuals, firms, and society make decisions to allocate limited resources among many competing wants

Microeconomics

The study of decision-making by individuals, businesses and industries.

Macroeconomics

The study of broader issues in the economy, such as inflation. unemployment and national output.

Macroeconomic Policy

Made by government entities such as federal reserve, congress, and the president.

Models

Crafted from new ideas, then tested against real-world data.

Ceteris Paribus

An assumption used in economics is that all other relevant factors or variables are held constant.

Efficiency

How well resources are used and allocated.

Equity

The fairness of various issues and policies.

Positive Analysis

The use of statements or questions that are based on the understanding of information or facts.

Normative Analysis

The use of statements or questions that are based on opinions or societal beliefs on what should or should not take place.

Scarcity

Unlimited wants clash with limited resources.

Opportunity cost

The value of the next best alternative use of resources.

The gains from specialization

Individuals tend to work in careers most suited to them.

Efficiency of competition

Private markets and competition force businesses to be efficient or be driven out.

Messy Outcomes

Markets sometimes result in undesirable outcomes (pollution)1

Adam Smith

Professor of moral philosophy in 1751. Published An inquiry into the nature and causes of the wealth of nations. (economic analysis)

Factors of Production

Land, labor, capital, and entrepreneurial ability.

Production

The process of converting factors of production into outputs.

Production Efficiency

Goods and services are produced at their lowest resource (opportunity) cost.

Allocative Efficiency

The mix of goods and services produced is just what society desires.

Production Possibilities Frontier

A model that shows the combinations of two goods a society can produce at full employment.

Opportunity Cost

The cost of a good in terms of another that must be forgone.

Phyllis Wallace

First woman to earn a Ph.D. in economics. Worked at the CIA and was a professor at Mass IOT. First woman and African American in many of her career appointments.

Absolute Advantage

A country can produce more of a good than another country using the same amount of resources.

Comparative Advantage

A country has a lower opportunity cost of producing a good than another country.

Market

An institution that brings buyers and sellers together so that they can interact and transact with each other.

Price System

A name given to the market economy because prices provide considerable information to both buyers and sellers.

Demand

The maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, ceteris paribus.

Market Demand Curve

A horizontal summation of all individual demand curves.

Horizontal Summation

Adding the number of units of the product that will be purchased at each price by all consumers.

Nonprice Factors

Shift the demand curve.

Tastes and Preferences

Demand for products that are popular will increase.

Normal Goods

Demand increases as income increases.

Inferior Goods

Demand decreases as income increases.

Price of Complements

Complements are typically consumed together. If the price of a good increases, one buys less of that good, and the demand for its complement decreases.

Number of Buyers

As more consumers enter a market, demand increases.

Supply

The maximum amount of a product that sellers are willing and able to offer for sale over some time period at various prices, ceteris paribus.

Law of Supply

Price and quantity supplied are positively related. As prices rose, providers want to sell more to maximize profit.

Market Supply Curve

Horizontal summation of all individual supply curves.

Product Technology

Supply increases when improvements in technology lower the cost of production.

Cost of Resources

Supply increases if the cost of resources used decreases, vice versa.

Market Equilibrium

Occurs when quantity supplied equals quantity demanded.

Alfred Marshall

Developed modern supply and demand analysis. Published principles of economics.

Consumer Surplus

The difference between what consumers are willing and able to pay and the market price.

Producer Surplus

The difference between the market price and the price at which firms are willing to supply it.

Market Efficiency

Markets are efficient when they generate the largest possible amount of net benefits to all parties involved.

Total Surplus

The sum of consumer surplus and producer surplus is maximized when markets are efficient.

Deadweight Loss

The reduction in total surplus that results from the inefficiency of a market that is not in equilibrium.

Laissez-Faire

A market that is allowed to function without any government intervention.

Price Ceiling

The maximum price established by the government for a product or service.

Price Floor

The minimum price established by the government for a product or service.

Market failure

Lack of competition, Mismatch of information, Existence of externalities, Existence of public goods.

Lack of Competition

A firm can raise its price without worrying that other firms will undercut its price.

Asymmetric Information

Occurs when one party to a transaction has better information than another party, such as when purchasing a used car or an expensive artpiece.

External Benefit

Occurs when an action has a positive effect on a third party.

External cost

Occurs when an action adds a cost to a third party.

Nonexclusive

Once a public good is provided, no one can be excluded from consuming it.

Nonrival

One person’s consumption does not diminish benefits to others.

Climate Change

Is a market failure because it exhibits characteristics of public goods.

Health Care

It is a service that is difficult to provide to everyone, especially when some people choose not to buy health insurance.

Education

Offers external benefits by making society more productive. But increasing educational opportunities requires subsidies that are funded by tax revenues.

Amartya Sen

Address causes of poverty. Won the Nobel Prize in Economic Sciences in 1998.